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2324 Words Nov 27th, 2012 10 Pages
"Hocus-Pocus Accounting" by Douglas R. Carmichael, Journal of Accountancy, October 1999; Vol. 188, Iss. 4; pg. 59, 5 pgs
Abstract:
SEC Chairman Arthur Levitt decried what he termed "accounting hocus-pocus" and called for coordinated efforts to uncover it. He targeted the practice by some companies of improperly boosting reported earnings by manipulating the recognition of revenue. Among the most common methods of doing this are the bill-and-hold transaction and a long list of sham transaction involving shipping, billing and/or related-party involvements. Both the SEC and the AICPA seek to increase independent auditors' awareness of problems associated with these practices. Full Text: | Copyright American Institute of Certified Public
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The SEC has emphasized that the above is not a simple checklist. A transaction might meet all the criteria and still fail the revenue-recognition guidelines. The following factors also must be considered:
* The date the seller expects payment and whether the seller has modified its normal billing and credit terms for the buyer.
* The seller's past experiences with bill-and-hold transactions.
* Whether the buyer has the expected risk of loss in the goods' market value.
* Whether the seller's custodial risks are insurable and insured.
* Whether Accounting Principles Board Opinion no. 21, Interest on Receivables and Payables (on discounting the related receivable), applies.
* Whether the business reasons for the transaction have introduced a contingency to the buyer's commitment.
A WELL-PREPARED AUDITOR
In planning the audit of all revenue transactions, the auditor must understand the client's industry, business and products as well as its procedures for accepting orders, shipping goods, billing and recording sales and removing product from inventory. When a client engages in bill-- and-hold transactions, he or she should determine whether the transactions comply with the SEC's criteria.
Auditors need to consider many factors to assess the appropriateness of revenue recognition. For example, in an SEC enforcement case, the seller was a toy maker with a highly seasonal business. Its customers couldn't accept

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